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Not your usual David versus Goliath story

Financial technology start-ups (fintechs), is creating buzz in Asia, perhaps more so than in other parts of the world because of its potential to reach Asia’s huuge unbanked population.

When it first arrived, its relationship with the bigger financial services players, had been tumultuous; fintechs were offering similar services but with more agility, competitive pricing and via friendlier user interfaces.

Since then, the relationship has evolved into one of so-called peaceful co-existence and collaboration. But the general perception has always been that fintechs get the shorter end of the stick. In Malaysia more than most other countries in Asia, regulations are not keeping up with the market demand and potential for digital-based financial tools.

Banks are the bigger entities with financial heft, the massive install base and established trust of customers. The tale of David and Goliath comes to mind because it paints a romantic picture of the underdog beating their bigger competition, but it is a long and challenging journey before that can ever happen.

So, when an experienced IT professional in capital markets, argues that the local scenario is not favourable for the big banks as well, one sits up and listens.

Banks, fintechs in the same boat

The capital markets veteran who wished to remain anonymous pointed out, “Why should the regulators be softer on the fintech than on the bank?”

According to him, fintechs have only one business model to think about, for example as a payment gateway. “They can offer it at extremely low cost as their cost structure is not the same as the whole bank’s.

“Furthermore, they only exist online, so they do not have to comply to the regulatory requirements that is needed for a physical office.”

A few banks have found ways to overcome restrictions to starting their digital services journey, by owning separate fintech entities. Spain’s BBVA is one example of this, acquiring online banking startup, Simple, and entering the same playing field as fintechs offering what fintechs offer while continuing to support their traditional customer base.

“We are competing to be the Amazon or Netflix of banking. And we are confident that BBVA will be one of the winners in this competition,” BBVA’s Global Executive Chairman, Francisco González had said.

By using a separate entity, banks are also able to address regulators’ holistic scrutiny – regulators would review banks holistically to ensure that they comply to the overall regulatory requirement and governance. This delays time-to-market and compromises the bank’s agility. A separate entity like Simple for example, is less likely to be subject to this.

Our capital markets expert opined that banks are also not able to offer only part of a banking solution the way that fintechs can, because the bank’s core banking system has to be taken into consideration.

Whilst a separate entity is a good workaround, our expert source said a sustainable solution to this issue would be to differentiate between customer protection and governance versus service delivery. Regulatory frameworks were created to protect customers’ interest and governance is to ensure banks comply to guidelines to ensure there are no irregularities in terms of money management.

“This is fine, regulators are expected to do this,” he said.

“But, when it comes to services like payments, processing, statements and more, this is where fintechs have it easier as they are not bound by the whole regulatory framework like a bank is.”

Interests of the customer, business and industry-at-large has to be protected via regulation and governance without a doubt and that goes without saying, but not at the expense of innovation, moving forward and getting-things-done.

Re-regulation has to happen and if it does, a simple ‘painting everything with the same brush’ approach is not going to work here. A fine-toothed comb is called for instead.